The Boys of Summer: 2013 Market Returns

The Dow Jones Industrial Average (DJIA) index is up 13.8% half-way through the year.  The Standard & Poor 500 (S&P 500) index is up almost as much, at 12.6%, but the markets didn’t rise over the last six months in a straight line.   They rarely do. The markets were all over the place.  Sometimes up, sometimes down, especially over the last month.

Two weeks ago, the DJIA had its first three day triple-digit winning streak of 2013.  Market timers were buying in.  This followed a three day plunge the week before.  Market timers were getting out.  The ultimate result of their actions is what we call “buying high” and “selling low.”  That is the opposite of what you want to do.

Recently, the stock markets seem to have the “jitters.”  To put it another way, the stock market was “skittish” during the first half of the year.  Why was that?  Could investors and their advisors have seen or forecasted this skittishness? The answer is an emphatic NO!

Remember, it has been proven time and time again that all knowable and predictable information is already reflected in the price of a stock.  The academic research is overwhelming.   It has been proven time and time again that only unknowable and unpredictable information causes a stock to go up or down.  The only “pattern” is that stocks tend to rise over the long run.

 Interestingly, if there are 100 advisors, 50 predict that a market will rise and 50 predict a downturn, then the 50 who were correct will be hailed as stock market seers, and their opinion will be highly sought after. The next time that happens, of the 50 winners the last time around, 25 may predict a market rise and 25 may forecast a downturn.  The 25 who were correct will be declared stock market geniuses.

But doesn’t this sound more like “chance” rather than “skill”?  You bet it does!  Luck truly has more to do with market timing success than any other factor, but it is almost impossible to convince most financial advisors of this truth. Yet, as mentioned, there is the issue of “unknowable and unpredictable information” that can cause an upswing or a downturn.  Does this actually happen?  Sure it does.  Can it be predicted?  Obviously not, since by definition, it’s unknowable and unpredictable.

A perfect example of this was the Federal Reserve declaration that they will wind down its qualitative easing efforts – eventually if it made sense for the economy.

So the markets dropped, only to rise again a week later. The apparent result?  The S&P 500 index was off 1.5% for June, but up for the quarter and up for the year.

So, how should the prudent, long term investor react to all of this skittishness?

Diversify- focus on asset class diversification not sectors.

Own equitiesavoid market timing, stock picking, or chasing yesterday’s winners.

Rebalance- religiously.

Here’s a link to a 2 minute video from Rueters about the 3 day stock market surge two weeks ago, which followed a 3 day drop the week before.

About Paul Nichols

Paul is the founder of Financial Abundance, a Registered Investor Advisory firm and EDI, an Estate Planning Firm with offices in State College and Lewisburg. He has been working with individuals, families and businesses for over twenty years, including many Fortune 500 companies. He has educated tens of thousands of people through seminars, workshops and various international speaking engagements where he shared the stage with many notable individuals such as Ronald Reagan, Robert Kiyosaki (author of Rich Dad, Poor Dad), Mike Ditka, General Schwarzkopf, and Newt Gingrich to name a few.

In 2000, after many years of traveling to consult companies and individuals, Paul decided to relocate from Colorado to State College, PA (his wife’s hometown) to develop a local advisory firm.

Paul operates under the core belief that education plus understanding leads to clarity and confidence; resulting in peace of mind. He is a proud father of three and devoted husband of 20 plus years.

Some of Paul’s accomplishments:
Regular contributor to the Centre Daily Times, via the “It’s Your Money” blog
Featured in the movie Navigating the Fog of Investing
Regular contributor to Town & Gown as the publications Investor Coach
Host of the weekly iTunes Podcast, It’s Your Money
Member of the Western PA Better Business Bureau
Member of the Centre County Chamber of Business and Industry